First Time Investor, FHA loan in NY

[Mary Bailey]

Hey everyone! My name is Mary and I'm preparing to purchase my first investment property. My plan is to "house hack" my way up the ladder, starting by purchasing a 4-bedroom house and renting out 3 of the rooms to local college students. However, I have a question about financing: I've been looking around a bit at different lenders, but due to my lack of an extensive credit history, I'm not sure I would qualify for terms that would be in my favor (or qualify at all). But I seem to remember being told by a representative recently that if I ALREADY had tenants lined up to occupy the home with me, then the bank would use that information (the expected rental income I'm assuming) to make their decision of whether or not to finance the purchase. Is this true? Would getting approved for financing be easier if I already had tenants ready to sign a lease?

I live in NY, and because I'm a first time homebuyer, I was hoping to go the FHA route with 97% financing, potentially down payment assistance (I have a comfortable savings but would rather save it for holding costs/emergencies than spend a chunk on a down payment).

Any advice is appreciated. Thanks!

[Andrew Postell]

@Mary Bailey I need to provide some clarification here: you can absolutely use rental income to qualify for a FHA mortgage. You DO NOT have to have renters already lined up. You also DO NOT need a 2 year history of rental income to qualify. The trouble you are running into is with bank "overlays". Investment properties are more risky for banks to write mortgages on. Some banks add extra rules to lessen their risk to investment properties. Those extra rules are what we call "overlays". What you need to do is find a bank with no overlays...or at least very few overlays. Usually a smaller or mid-sized bank has the most flexible lending. That way you can get the best loan available to you with the easiest qualifying process.

The true FHA rule (with no overlays) to using rental income is that if you are purchasing a home, the appraisal that is performed on the home will have rental comparisons, that rental income will be used as the gross rental income, calculated at 75%, and used for qualifying purposes.

So, yes, you can absolutely buy a multi-unit property, use the potential rental income, even if the property is currently empty.  Hope this helps but feel free to ask additional questions here in the forum if you need.  Thanks!